Every year thousands of people consider entrepreneurship. The two primary routes people use are starting their own business or buying an existing one. Each path to business ownership has a variety of advantages and disadvantages that the would-be entrepreneur should consider.
Starting a Business
Starting your own business can be very rewarding, but generally requires an idea or concept that revolves around a unique product, technology, or marketing plan. Developing a business idea from scratch will usually involve less up front costs compared to buying a business, and can frequently be tested from a home or small office. You also won't have to pay someone for goodwill. Keep in mind though that researching a new business idea is extremely important because frequently, ideas that seem to make initial sense do not after a detailed investigation. There may be little or no demand for the product or service, or competition may be so fierce that a profit cannot be made. Thorough research should tap as many resources as possible, such as the Small Business Administration, other business owners, the Internet, your local library, and relevant trade associations.
There are usually a number of disadvantages to starting your own business. You will need to attract customers, which can involve quite a bit of time and effort. Because there may be months or even years of few, if any, profits from the business, you may need to support yourself with personal savings. Financing a new business can also be very difficult. Most people rely on their family, friends, and personal funds to get them through the rough times until profitability. Another important factor to consider is the risk. The chances of survival for a start up business are very low. Some surveys indicate up to a 75% failure rate.
Buying a Business
Buying a business can be a more effective way to business ownership, but is frequently more costly. Existing business owners will expect you to pay a premium for providing you with an existing customer base and location. In addition, there can be contingent liabilities associated with buying an existing business, although structuring the transaction as an asset purchase can usually protect you from these liabilities.
The advantages to buying an existing business typically outweigh the disadvantages. Existing businesses can usually obtain financing from financial institutions because they have an established history, assets, and a proven idea. Or, the seller of the business will provide a portion of the financing in the form of a loan. Established businesses are less risky because there is an existing customer base, relationships with suppliers, operating processes, a known location, and employees have already been hired and trained. In addition, there is existing cash flow which will likely provide some immediate income to the buyer.
Experts generally agree that, in most cases, paying the extra cost for an existing business will outweigh the risks of starting one from scratch